In recent months, the highest courts of several US states have issued important pro-policyholder decisions on insurance coverage issues. The following three cases illustrate important points for policyholders:

1. Xia v. ProBuilders: The Pollution Exclusion Has Limits

The Washington Supreme Court recently addressed the scope of the pollution exclusion in comprehensive general liability (CGL) policies in Xia v. ProBuilders Specialty Insurance Co. RRG, 400 P.3d 1234 (Wash. 2017). The Court recognized that pollution exclusions are “an important tool for insurers to avoid liability stemming from loss caused by pollutants acting as pollutants where the insured paid no premiums for such coverage.” The Court noted, however, that the ProBuilders pollution exclusion clause did not exclude all pollution. Under Washington law, the rule of efficient proximate cause provides coverage “where a covered peril sets in motion a causal chain.” The Washington Supreme Court held that, so long as the initial event in a causal chain is a covered risk, an insured has coverage under the policy regardless of whether subsequent events within the chain are excluded by the pollution exclusion.

In Xia, the Court considered the injuries of a policyholder stemming from the negligent installation of a water heater that led to a release of carbon monoxide gas. The Court recognized that carbon monoxide released into a home was a “pollutant” within the meaning of the pollution exclusion, since it was a gaseous vapor or fume that could adversely affect human health. But the efficient proximate cause of that release and the policyholder’s injury was the negligent installation of the water heater, which was a covered peril. The pollution exclusion did not eliminate coverage just because an uncovered peril appeared later in the causal chain. The Court thereby forestalled the insurer’s attempt to overuse the pollution exclusion to improperly deny coverage.

2. Harleysville v. Heritage: An Insurer’s Response to a Coverage Request Must Be Clear

The South Carolina Supreme Court also issued a pro-policyholder ruling in Harleysville Group Insurance v. Heritage Communities, Inc., 420 S.C. 321 (2017). In this ruling, the Court addressed how an insurer may respond to a request for defense coverage under a CGL policy. An insurer generally has three choices — accept coverage, deny coverage, or accept coverage pursuant to a reservation of rights. The Court ruled that if the liability insurer chooses to reserve its rights, the insured must be provided sufficient information in the reservation of rights letter to understand the reason the insurer believes the policy may not provide coverage. The Court held that generic or vague responses to requests for coverage, coupled with furnishing the insured with a verbatim recitation of all or most of the policy provisions through a cut-and-paste method, is not sufficient. The insurer must give fair notice that it intends to assert a defense to a request for coverage or to pursue a declaratory relief action at a later date. Otherwise, if the insured is not aware of the grounds on which the insurer will contest coverage, the insured loses the opportunity to investigate and prepare a defense of its own. To be effective, the insurer’s response letter must be clear, and any ambiguity will be construed strictly against the insurer and liberally in favor of the insured.

In Harleysville, the Court closely examined the liability insurer’s reservation letters and concluded that they were insufficient, since they (a) did not include the insurer’s position related to its quoted insurance provisions, (b) did not disclose the insurer’s intent to file suit to contest coverage, (c) did not inform the insureds of possible conflicts of interest and the need to protect their interests, and (d) generally failed to indicate that the insurer disputed coverage for any specific portion or type of damages. The Court held that the insurer had not properly reserved its rights, and thus could not contest coverage on grounds that were only vaguely articulated. Here, the South Carolina Supreme Court sent a clear message to insurers that any gamesmanship in reservation of rights responses is at the insurer’s peril.

3. Liberty Surplus v. Ledesma: An Employer Can Have Coverage Even if Its Employee Intentionally Commits Harm or Damage

In a third insurance coverage case, the California Supreme Court considered a California law question posed by the United States Court of Appeals for the Ninth Circuit: “When a third party sues an employer for the negligent hiring, retention and supervision of an employee who intentionally injured that third party, does the suit allege an ‘occurrence’ under the employer’s commercial general liability policy?” Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co., 5 Cal. 5th 216 (2018). The term “occurrence” was defined in the policy as an “accident.” The Court concluded that yes, such a claim against an employer can be considered accidental — even if the employee’s act is intentional — and thereby an employer may be entitled to coverage.

The Court began its analysis by reiterating long established duty to defend coverage standards under which the insured must provide only the existence of a potential for coverage under a policy, while the insurer must establish the absence of any such potential. To negate an obligation to provide a defense to its insured, the insurer must prove that there is no way the underlying claim can fall within policy coverage. The Court noted that negligent hiring, retention, or supervision claims seek to impose liability on the employer and not the employee. Thus, even in the face of clear intentional bad conduct or a willful act by an employee, an employer may still have coverage. Negligent hiring and supervision claims are based upon an independent tort in failing to prevent the employee’s bad acts, and thus there is an expectation of coverage so long as the employer did not act in a manner for which the intentional act exclusion barred coverage. The California Supreme Court noted that any other rule could leave employers without coverage if an employee’s conduct is deliberate.

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